At Morningstar: Asness Has No Simple Answer to Quant Strategy Losses

AQR CIO says firm is sticking with strategy until proven otherwise.

Even as AQR Capital Management’s multifactor quantitative strategy underperforms the broader market and the firm loses assets under management, Cliff Asness, managing principal and chief investment officer at the firm, is sticking with the strategy.

“We’re good at what we do at an atomic level. We’re sticking with multifactor [investing]. A feature of it not being easily explainable is a good thing. Being uncorrelated with other things is good. It becomes a bug when you’re having bad times,” Asness told attendees at the Morningstar Investment Conference.

He said there’s no simple explanation why the quantitative multifactor strategy is doing poorly. It’s one thing to explain why a single factor is underperforming but trying to explain total performance over the short to medium term is difficult. 

“Factor investing has been crappy,” Asness said.

AQR’s flagship mutual fund, AQR Multi-Asset Fund Class I (AQRIX) is up 0.53% on an annualized one-year basis, whereas the S&P 500 index is up 6.4% over the same timeframe. He says on a 20-year basis, from December 2000 to March 2019, net of fees, the AQR Global Stock Selection Strategy has a net annual return of 4.3% and a minus 0.17% correlation to the S&P.

“Somehow, making people a lot of money and not having a deep theme, this bothers no one. In a tough year, you need intuition. We all do. It’s what makes intuition hard, and it’s ok,” he said.

Asness said people have asked him if perhaps the strategy has been arbitraged away. He said the firm tests for every possibility of why now might be different and the strategy needs to be adjusted. What worries him is that factors can get arbitraged away if too much money pours in, but AQR watches for that.

“The silver lining is that I do think the strategy would be easier to go away if it weren’t so hard to stick with it at a difficult time,” he said.

Regarding the outflow of assets, Asness said: “We want people [investing with us] who know it will be tough to understand the strategy on a minute-by-minute basis; that shows people will stick with it.”

What makes him continue with the strategy, in part, is that they’ve been through rough times before, such as during the dot-com era when the strategy also lagged, then rebounded.

Holding fast even in downtimes is part of the point. “To survive long term, brace for the short term. Investing in a strategy where you are unlikely to stick with it long term is one of the most certain way to failure,” he said.

He said AQR takes reasonable size bets which helps it maintain the positions when it gets unlucky. Because AQR continually monitors to find a “smoking gun” for poor performance and keeps its positions manageable, it will “stick like grim death” to its beliefs, Asness said.

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